Financial well-being is not just about earning; it's about how efficiently you manage, save, and invest your money. Budgeting is the foundation of financial health, and mastering it can provide you with a lifetime of security. In this guide, we'll walk you through the simple steps to create a budget, helping you determine your income, expenses, and potential monthly savings.
Calculate your income
The first step in creating a budget is knowing exactly how much money you have coming in. Here’s how to determine your monthly income:
Wage(s): the most common source of income is what you earn from your job. Take your monthly salary after tax deductions or, if you are paid irregularly, calculate your monthly earnings accordingly.
Other income streams: do you have any other sources of income? Maybe you freelance, rent out a property or receive dividends from investments. Add up all these figures to understand your monthly income.
Track your expenses
Once you have a clear idea of your income, the next step is to determine your expenses. This might be the trickier part because expenses can be both fixed and variable.
Fixed expenses: these are the monthly expenses that remain relatively constant.
Rent or mortgage payments
Insurance (car, home, health)
Loan repayments
Subscription services like internet, phone plans, and streaming services
Variable expenses: these expenses fluctuate from month to month.
Groceries
Eating out or entertainment
Gas or public transportation costs
Personal care and clothing
Miscellaneous expenses like gifts, repairs, or unplanned purchases
To get an accurate picture, it's advisable to track your expenses for at least a month. Keep every receipt, or jot down every expense. At the end of the month, categorize and tally up the totals.
Calculate potential savings
The simple formula for determining your potential monthly savings is
Monthly Savings = Monthly Income - Monthly Expenses
When you subtract your total monthly expenses from your total monthly income, the remainder is what you could potentially save. If you end up with a negative number, it's a clear sign you're living beyond your means.
Adjust and optimise
Now that you have a clear picture of your income, expenses, and potential savings, you might want to make adjustments:
Revisit variable expenses: check if there are any unnecessary expenses or areas where you could cut back. Maybe you notice you’re eating out too often or splurging on impulse purchases. By reducing these expenses, you can increase your monthly savings.
Negotiate fixed expenses: while fixed expenses are typically non-negotiable, there are still ways you might reduce them. Consider switching providers for services like internet or insurance to get better deals. If you have loans, you might look into refinancing options.
Set clear financial goals
Budgeting becomes more effective and purposeful when you have clear financial goals. These could be short-term goals, like saving for a vacation, or long-term ones, like buying a house or retiring comfortably.
When you have a set goal, it's easier to stay motivated and make necessary adjustments to your spending habits. Allocate a portion of your savings to these goals every month.
Review regularly
Budgeting isn’t a one-time task. Your financial situation, goals, and priorities can change over time. Maybe you get a raise, or perhaps you have added expenses like starting a family or purchasing a car. Regularly reviewing and adjusting your budget ensures it remains relevant and practical.
Start today
Budgeting might seem daunting initially, but once you get the hang of it, it becomes second nature. It's one of the best tools you have to ensure financial well-being, offering clarity, control, and peace of mind. Start today, and take a step closer to achieving your financial dreams.
